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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 Commission File Number 001-31962   GOVERNMENT PROPERTIES TRUST, INC.  Maryland
    
    20-0611663(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)10250 Regency Circle, Suite 100Omaha, Nebraska 68114
    
    (402) 391-0010(Address of principal executive offices,
    
    (Registrants telephone number,including zip code)
    
    including area code)
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  As of April 30, 2004, approximately 20.7 million shares of common stock of the
registrant were outstanding.




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TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (unaudited)Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003
    
    
    2Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited)
    
    
    3Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)
    
    
    4Notes to Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1.
    
    Not applicableItem 2.
    
    Changes in Securities and Use of Proceeds
    
    
    25Items 3, 4 and 5.
    
    Not applicableItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    25Revolving Credit Agreement302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
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GOVERNMENT PROPERTIES TRUST, INC. 
 CONSOLIDATED BALANCE SHEETS March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSReal estate at cost :Land
    
    $
    5,308,237
    
    
    $
    4,545,637Buildings and improvements
    
    
    27,211,715
    
    
    
    24,050,859Tenant origination costs
    
    
    6,769,146
    
    
    
    6,200,441Furniture and equipment
    
    
    59,060
    
    
    
    34,48639,348,158
    
    
    
    34,831,423Accumulated depreciation
    
    
    (1,037,509
    )
    
    
    (757,400
    )38,310,649
    
    
    
    34,074,023Cash and cash equivalents
    
    
    149,521,349
    
    
    
    760,859Restricted cash escrows
    
    
    199,798
    
    
    
    268,885Restricted cash for letter of credit
    
    
    17,336,718
    
    
    
    Tenant receivables
    
    
    385,831
    
    
    
    332,651Notes receivable from tenant
    
    
    815,884
    
    
    
    111,773Deferred costs, net
    
    
    121,865
    
    
    
    1,948,350Real estate deposits
    
    
    1,000,000
    
    
    
    500,000Property held for sale
    
    
    4,271,071
    
    
    
    4,266,438Other assets
    
    
    760,979
    
    
    
    411,607Total assets
    
    $
    212,724,144
    
    
    $
    42,674,586LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Accounts payable and accrued expenses
    
    $
    848,316
    
    
    $
    2,116,101Dividend payable
    
    
    3,102,075
    
    
    
    147,536Lines of credit
    
    
    
    
    
    
    3,047,655Mortgage notes payable
    
    
    24,569,360
    
    
    
    24,647,478Mortgage note payable  affiliate
    
    
    
    
    
    
    1,639,219Liabilities related to property held for sale
    
    
    3,211,888
    
    
    
    3,195,359Advances from affiliate
    
    
    
    
    
    
    102,873Total liabilities

    
    
    31,731,639
    
    
    
    34,896,221Stockholders equity:Common stock ($0.01 par value at March 31,
2004 and $10 par value at December 31, 2003;
50,000,000 shares authorized, 20,680,502 and
975,552 shares issued and outstanding at
March 31, 2004 and December 31, 2003,
respectively)
    
    
    205,093
    
    
    
    9,755,527Accumulated deficit
    
    
    (3,302,324
    )
    
    
    (386,586
    )Additional paid-in capital
    
    
    187,709,088
    
    
    
    (1,073,299
    )Dividends declared
    
    
    (3,619,352
    )
    
    
    (517,277
    )Total stockholders equity
    
    
    180,992,505
    
    
    
    7,778,365Total liabilities and stockholders equity
    
    $
    212,724,144
    
    
    $
    42,674,586
 See accompanying notes. 2




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GOVERNMENT PROPERTIES TRUST, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)Three Months EndedMarch 31,2004
    
    2003Rental income
    
    $
    1,043,993
    
    
    $
    76,405Expenses:Property operations
    
    
    247,778
    
    
    
    12,618Real estate taxes
    
    
    148,097
    
    
    
    5,236Depreciation and amortization
    
    
    280,109
    
    
    
    24,148General and administrative
    
    
    1,030,544
    
    
    
    95,520Total expenses
    
    
    1,706,528
    
    
    
    137,522Operating loss
    
    
    (662,535
    )
    
    
    (61,117
    )Other income
    
    
    243,269
    
    
    
    6,311Interest expense:Expense
    
    
    (398,829
    )
    
    
    (12,063
    )Expense from issuance of warrant
    
    
    (2,097,900
    )
    
    
    Amortization of deferred financing fees
    
    
    (3,614
    )
    
    
    Loss from continuing operations
    
    
    (2,919,609
    )
    
    
    (66,869
    )Discontinued operations:Income from property held for sale
    
    
    3,871
    
    
    
    20,660Net loss
    
    $
    (2,915,738
    )
    
    $
    (46,209
    )Earnings per share (basic and diluted):Loss from continuing operations
    
    $
    (0.20
    )
    
    $
    (0.12
    )Income from discontinued operations
    
    
    
    
    
    
    0.04Net loss
    
    $
    (0.20
    )
    
    $
    (0.08
    )Distributions declared per share
    
    $
    0.15
    
    
    $
    0.15Weighted average shares outstanding (basic and diluted)
    
    
    14,712,297
    
    
    
    553,281
 See accompanying notes. 3




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GOVERNMENT PROPERTIES TRUST, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (2,915,738
    )
    
    $
    (46,209
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    280,109
    
    
    
    24,147Amortization of deferred financing fees
    
    
    3,614
    
    
    
    Compensation expense
    
    
    108,751
    
    
    
    Expense from issuance of warrant
    
    
    2,097,900
    
    
    
    Changes in assets and liabilities:Restricted cash escrows
    
    
    69,087
    
    
    
    (680,470
    )Tenant receivables
    
    
    (53,180
    )
    
    
    Note receivable from tenant
    
    
    (704,111
    )
    
    
    Other assets
    
    
    (337,476
    )
    
    
    (82,153
    )Accounts payable and accrued expenses
    
    
    555,086
    
    
    
    (51,535
    )Net cash used in operating activities
    
    
    (895,958
    )
    
    
    (836,220
    )Cash flows from investing activities:Expenditures for real estate
    
    
    (4,416,735
    )
    
    
    (2,399,316
    )Restricted cash for letter of credit
    
    
    (17,336,718
    )
    
    
    Deposits on future real estate purchases
    
    
    (600,000
    )
    
    
    (586,262
    )Cash used in investing activities
    
    
    (22,353,453
    )
    
    
    (2,985,578
    )Cash flows from financing activities:Net (repayment) borrowing under lines of credit
    
    
    (3,047,655
    )
    
    
    1,547,464Payments on mortgage notes payable  affiliate
    
    
    (1,639,219
    )
    
    
    Repayments of advances from affiliate
    
    
    (102,873
    )
    
    
    (196,462
    )Principal payments on mortgage notes payable
    
    
    (78,118
    )
    
    
    Proceeds from sale of common stock
    
    
    193,202,100
    
    
    
    3,935,930Offering costs paid
    
    
    (16,176,798
    )
    
    
    (398,199
    )Dividends paid
    
    
    (147,536
    )
    
    
    (11,019
    )Net cash provided by financing activities
    
    
    172,009,901
    
    
    
    4,877,714Net increase in cash and cash equivalents
    
    
    148,760,490
    
    
    
    1,055,916Cash and cash equivalents, beginning of period
    
    
    760,859
    
    
    
    2,314,319Cash and cash equivalents, end of period
    
    $
    149,521,349
    
    
    $
    3,370,235
 See accompanying notes. 4




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GOVERNMENT PROPERTIES TRUST, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Government
Properties Trust, Inc., a Maryland corporation, have been prepared pursuant to
Securities and Exchange Commission (SEC) rules and regulations and should be
read in conjunction with the consolidated financial statements and notes
thereto included in the 2003 Form 10-K. The accompanying consolidated
financial statements highlight significant changes to the Notes included in the
2003 Form 10-K and present interim disclosures as required by the SEC. The
accompanying consolidated financial statements reflect, in the opinion of
management, all adjustments considered necessary for a fair presentation of the
interim financial statements. All such adjustments are of a normal and
recurring nature. The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States (GAAP) requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expense during the reporting periods. Our results for the quarter ended
March 31, 2004 are not necessarily indicative of our results for any future
interim period or for the full fiscal year. Certain reclassifications have been made to the previously reported 2003
consolidated financial statements in order to provide comparability with the
interim period financial statements reported herein. These reclassifications
have not changed the 2003 results of operations or stockholders equity. 2. Nature of Business and Operations The Company was incorporated in Michigan in 1998. In January 2004, the Company
completed a public offering of its common stock and listed its common stock on
the New York Stock Exchange. In connection with this offering, the Company
reincorporated in Maryland and changed its name to Government Properties Trust,
Inc. The historical operations included in the consolidated financial
statements are those of its predecessor company (Gen-Net Lease Income Trust,
Inc.). References to the Company for periods prior to 2004 refer to Gen-Net
Lease Income Trust, Inc. and to Government Properties Trust, Inc. for
subsequent periods. The Company has elected to be taxed as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended,
beginning in 2003. The Company began formal operations with its first property acquisition in
December 2002 and, as of March 31, 2004, the Company owned six properties
(includes one property held for sale  See Note 11) located throughout the
United States. The Company acquires properties through various operating
entities, which are wholly-owned by the Company. The Company operates in one
segment. Between October 2002 and August 2003, the Company sold 955,552 shares of its
common stock at $10 per share. In January 2004, the Company sold 19.3 million
shares of its common stock (the Offering) at $10 per share and listed its
common stock on the New York Stock Exchange. The Offering raised approximately
$177.1 million in net proceeds. 3. Common Stock and Earnings Per Share The Company reports earnings per share pursuant to Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Basic and diluted loss per
share attributable for all periods presented is computed by dividing the loss
to common stockholders by the weighted average number of common shares and
potential common stock outstanding during the period. The Company had no
common stock equivalents outstanding for the three months ended March 31, 2003.
The Company had nonvested stock grants of 62,084 shares outstanding during the
three months ended March 31, 2004 which were not included in the computation of
diluted earnings per share because the effect would have been anti-dilutive. 5




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4. Deferred Costs Deferred costs consist of the following: March 31,
    
    December 31,2004
    
    2003Financing costs
    
    $
    134,709
    
    
    $
    134,709Offering costs
    
    
    
    
    
    
    1,822,871Accumulated amortization
    
    
    (12,844
    )
    
    
    (9,230
    )$
    121,865
    
    
    $
    1,948,350
 In connection with the completion of the Offering, offering costs of $1.8
million at December 31, 2003 were reclassified to Additional Paid-in Capital in
the accompanying consolidated balance sheet. 5. Restricted Cash for Letter of Credit In March 2004, the Company placed approximately $17.3 million of operating cash
into a restricted cash account to secure a letter of credit in connection with
a proposed property acquisition. 6. Equity Incentive Plan The Company has a 2003 Equity Incentive Compensation Plan, which has 1,000,000
shares of Common Stock reserved for issuance thereunder. In connection with
the original issuance of shares during the first quarter of 2004, the Company
adopted the fair value recognition provisions of SFAS No. 123, Accounting for
Stock Based Compensation. The Company recognizes compensation expense for restricted shares issued based
upon the fair market value of the common stock at the grant date. Compensation
expense is recognized on a straight-line basis over the vesting period. During
the three months ended March 31, 2004, the Company granted 174,950 restricted
shares pursuant to the Plan. The fair value of the shares at the time of the
grant was $13.90 per share. Of the shares issued, 3,750 shares vested
immediately. The remaining 171,200 restricted shares were outstanding at March
31, 2004 and vest over periods of three to five years. Compensation
expense recognized and included in general and administrative expense in the
accompanying consolidated statement of operations was $108,751 for the three
months ended March 31, 2004. As of March 31, 2004, there are 825,050 shares
available for grant under the Plan. 7. Lines-of-Credit, Mortgage Notes Payable and Mortgage Note Payable 
Affiliate Lines-of-credit, mortgage notes payable, and mortgage note payable  affiliate consisted of the following: March 31,
    
    December 31,2004
    
    2003Lines of CreditLine-of-credit with a financial institution
for property acquisitions, principal repaid
and line retired in February 2004, interest
at the financial institutions prime rate
(4.0% at December 31, 2003), plus 50 basis
points per annum. Advances were payable 180
days after the advance and were secured by a
subordinated mortgage on the acquired
property (A)
    
    $
    
    
    
    $
    2,287,510Unsecured line-of-credit with a financial
institution (maximum borrowing $150,000),
interest at prime rate (4.0% at December 31,
2003), principal repaid and line retired in
February 2004 (A)
    
    
    
    
    
    
    110,145Unsecured line-of-credit with a financial
institution (maximum borrowing $1,000,000),
interest at fixed rate of 20%, principal
repaid and line retired in January 2004 (A)
    
    
    
    
    
    
    650,000Total lines of credit
    
    $
    
    
    
    $
    3,047,655Mortgage Notes Payable(B),(C)
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March 31,
    
    December 31,2004
    
    2003Mortgage notes payable to various financial
institutions, collateralized by various
properties, interest at fixed rates ranging
from 5.7%to 8.3% per annum, with principal
and interest payable monthly through 2013.
The weighted average rate at both March 31,
2004 and December 31, 2003 was 6.0%
    
    $
    24,569,360
    
    
    $
    24,647,478Mortgage Note Payable  Affiliate(C)Mortgage note payable to Genesis
collateralized by a subordinated mortgage on
one property, interest at LIBOR (1.12% at
December 31, 2003) plus 250 basis points per
annum payable monthly and principal repaid
and line retired in January 2004. (A)
    
    $
    
    
    
    $
    1,639,219
   (A)
    
    Debt outstanding at December 31, 2003 was retired with funds received in
connection with the Offering.(B)
    
    The mortgages notes payable are subject to various operating covenants.
In addition, the Company must periodically fund and maintain escrow
accounts to fund future real estate taxes, repairs and maintenance and
insurance payments, as well as to fund certain tenant releasing costs.
These escrow accounts are included in restricted cash escrows.(C)
    
    A portion of the Companys real estate assets have been pledged as
collateral for its mortgages notes payable, certain lines of credit and
mortgage note payable  affiliate. (See Liquidity and Capital Resources). Total interest paid on the lines-of-credit and mortgage notes payable was
$505,096 and $7,713 for the three months ended March 31, 2004 and 2003,
respectively (including interest paid to Genesis Financial Group, Inc.
(Genesis) of $1,973 and $0 in 2004 and 2003, respectively). During the three
months ended March 31, 2004 and 2003, the Company incurred interest expense of
$398,829 and $12,064, respectively (including interest incurred with Genesis of
$1,973 and $0 in 2004 and 2003, respectively). 8. Related Party Transactions Prior to the Offering, Genesis provided the Company with property acquisition
services, property disposition services, administration services and property
management services. Genesis now provides only property acquisition services.
A summary of the terms of these services provided by Genesis are as follows: Fee
    
    CompensationAcquisition Fees
    
    Up to 1% of the property purchase price for an
acquisition fee plus up to 2% of the acquisition
fee for acquisition related expenses.Property Management Fees
    
    For day-to-day property management
 3% of gross
rental revenue.Administrative Fees
    
    For day-to-day administrative support to the
Company  3% of gross rental revenue and
out-of-pocket expenses.
 The following is a summary of the fees incurred and payable: March 31,
    
    March 31,2004
    
    2003Payable
    
    Incurred
    
    Payable
    
    IncurredAcquisition fees(A)
    
    $
    
    
    
    $
    50,350
    
    
    $
    
    
    
    $
    23,500Property management fees(B)
    
    
    
    
    
    
    10,888
    
    
    
    1,639
    
    
    
    5,018Administrative fees(C)
    
    
    
    
    
    
    10,237
    
    
    
    5,018
    
    
    
    5,018
   (A)
    
    Amounts included in real estate cost in the Consolidated Balance Sheets.(B)
    
    Amounts included in property operations expense in the Consolidated Statements of Operations.(C)
    
    Amounts included in general and administrative expense in the Consolidated Statements of Operations. In addition, Genesis owed the Company $310,000 (included in other assets) at
March 31, 2004 and December 31, 2003 for previous 7




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offering costs. The amount is non-interest bearing and payable upon demand. 9. Property Acquisitions The Company acquired the following properties in 2004 and 2003. The results of
their operations are included in the Companys consolidated statements of
operations from their respective dates of acquisition. Acquisition
    
    MonthProperty
    
    Location
    
    Cost
    
    Acquired2003 acquisitions(A):USDEA Building (Bakersfield Property)
    
    Bakersfield, CA
    
    $
    2,385,804
    
    
    JanuarySocial Security Administration Offices
(Charleston Property)
    
    Charleston, WV
    
    
    18,429,886
    
    
    AprilGeneral Services Administration Office
(Clarksburg Property)
    
    Clarksburg, WV
    
    
    10,989,117
    
    
    AprilSocial Security Administration Office
(Kingsport Property)(B)
    
    Kingsport, TN
    
    
    2,992,130
    
    
    April$
    34,796,9372004 acquisition(A):Bureau of Public Debt (Mineral Wells
Property)(C)
    
    Mineral Wells, WV
    
    $
    5,109,486
    
    
    March
  (A)
    
    In accordance with SFAS 141, the Company allocated the purchase price for
these properties to net tangible and identified intangible assets acquired
based on their fair values (including land, buildings, tenant
improvements, acquired above and below market leases and the origination
cost of acquired in-place leases) and acquired liabilities, and allocated
the purchase price based on these assessments, including land at appraised
value and buildings at replacement costs. The Company assessed fair value
based on estimated cash flow projections that utilize discount and
capitalization rates deemed appropriate by management and available market
information. The value of tenant origination costs are amortized over the
remaining term of the respective leases.(B)
    
    In connection with the purchase of this property, the Company assumed a
first mortgage note and an unsecured note payable totaling $2,496,652.(C)
    
    In connection with the purchase of this property, the Company assumed a
note receivable from tenant in the amount of $694,293. The interest on
the note receivable is fixed at 8% per annum with principal and interest
payable monthly through 2012. 10. Unaudited Pro Forma Condensed Consolidated Statements of Operations The accompanying unaudited Pro Forma Condensed Consolidated Statements of
Operations are presented as if, at January 1, 2003, the Company acquired the
properties described in Note 9  Property Acquisitions and the shares
outstanding at March 31, 2004 were also outstanding at January 1, 2003. In
managements opinion, all adjustments necessary to reflect the effects of the
above transactions have been made. The unaudited Pro Forma Condensed Consolidated Statements of Operations are not
necessarily indicative of what the actual results of operations would have been
assuming the above mentioned transaction had occurred at the dates indicated
above, nor do they purport to represent our future results of operations.  8




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Pro Forma Condensed Consolidated Statements of Operations(Unaudited) Three Months EndedMarch 31,2004
    
    2003Rental income
    
    $
    1,124,843
    
    
    $
    1,132,397Loss from continuing operations
(A)
    
    $
    (2,851,748
    )
    
    $
    (639,823
    )Loss per diluted common share from continuing
operations
    
    $
    (0.14
    )
    
    $
    (0.03
    )
  (A)
    
    Includes expense of approximately $2.1 million for issuance of
warrant  See Note 12. 11. Property Held for Sale In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company reflects the historical operating results of
properties sold or held for sale, as well as gain or loss on sale from these
properties, as discontinued operations in the consolidated balance sheets for
periods prior to their sale. The Company is actively marketing the Harahan, LA property which was originally
purchased in December 2002. Harahan is the only property the Company owns
which is leased by a non-governmental tenant. At March 31, 2004, the Harahan
property was considered held for sale and the related assets and liabilities
classified as held for sale are comprised of the following at March 31, 2004
and December 31, 2003: DecemberMarch 31, 2004
    
    31,2003Assets:Land
    
    $
    759,251
    
    
    $
    759,251Buildings and improvements
    
    
    3,149,042
    
    
    
    3,149,042Tenant origination costs
    
    
    480,017
    
    
    
    480,017Accumulated depreciation
    
    
    (151,230
    )
    
    
    (121,872
    )Deferred
costs, net
    
    
    33,991
    
    
    
    Total assets
    
    $
    4,271,071
    
    
    $
    4,266,438Liabilities:Accounts payable and accrued expenses
    
    
    64,639
    
    
    
    40,318Mortgage note payable
    
    
    3,147,249
    
    
    
    3,155,041Total liabilities
    
    $
    3,211,888
    
    
    $
    3,195,359
 The results of discontinued operations related to the Harahan property were
comprised of the following for the three months ended March 31, 2004 and 2003: 2004
    
    2003Rental income
    
    $
    90,860
    
    
    $
    90,860Property operations
    
    
    6,412
    
    
    
    2,858Depreciation and amortization
    
    
    29,359
    
    
    
    29,358Total expense
    
    
    35,771
    
    
    
    32,216Operating income
    
    
    55,089
    
    
    
    58,644Amortization of deferred financing fees
    
    
    (421
    )
    
    
    Interest expense
    
    
    (50,797
    )
    
    
    (37,984
    )Income from property held for sale
    
    $
    3,871
    
    
    $
    20,660
 12. Issuance of Warrant In connection with providing a line of credit, an affiliate of one of the
Companys underwriters in the Offering was issued a warrant to purchase up to
210,000 shares of common stock. The underwriters affiliate exercised the
warrant and the Company recognized an expense of approximately $2.1 million
during the three months ended March 31, 2004. 9




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13. Subsequent Events In April 2004, the Company entered into a $50 million revolving credit facility
to be used for short-term acquisition financing. The credit facility matures
in April 2005. Interest is variable and is based upon the prime rate which is
currently 4%. The Company paid a commitment fee of 0.50%, or $250,000 upon
execution of the agreement and will pay a fee of 0.50% of each advance. The
facility contains certain financial tests and restrictive covenants. In May 2004, the Company completed the cash acquisition of the United States
Federal Bureau of Investigation (FBI) building in Pittsburgh, Pennsylvania for a
purchase price of approximately $28 million. The facility is 100% occupied by
the FBI and totals over 161,000 square feet comprised of office space of 87,000
square feet and integrated parking of 74,000 square feet. 10




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements. These forward-looking
statements include estimates regarding:  -
    
    the sale of our Harahan property;-
    
    our estimated general and administrative expense;-
    
    our risk mitigation strategy;-
    
    our policy to reserve for operating expenses and capital costs;-
    
    our distribution policy;-
    
    our operating expenses;-
    
    the adequacy of our available capital for future capital requirements;-
    
    our capital expenditures; and-
    
    the impact of changes in interest rates. Forward-looking statements can be identified by the use of words such as may,
will, should, expects, plans, anticipates, believes, estimates,
predicts, intends, continues, or the negative of such terms, or other
comparable terminology. Forward-looking statements also include the assumptions
underlying or relating to any of the foregoing statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including the risks discussed in
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Risk Factors and elsewhere in this report. All forward-looking statements included in this report are based on information
available to us on the date hereof. We assume no obligation to update any
forward-looking statements. The following is a discussion of our interim results of operations, financial
condition and liquidity and capital resources for the three months ended March
31, 2004 compared to the corresponding period in 2003. It should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included herein and the 2003 Form 10-K. OVERVIEW We invest in single tenant properties under long-term leases to the U.S.
government, state governments, local governments, and government-sponsored
enterprises. We are a self-managed, self-administered company that has elected
to be taxed as a real estate investment trust, or REIT, under the federal tax
laws. We believe that we are the only public company focused solely on
investing in government-leased properties. We own each of our properties
through separate wholly-owned entities. Our business consists of buying and
managing recently built or renovated office properties primarily leased to the
federal government, acting through the Government Services Administration
(GSA), under long-term leases. At March 31, 2004, we
owned five GSA-leased properties that were acquired in early 2003 and 2004 (one property in the first quarter of
2003, three properties in the second quarter of 2003 and one property in the
first quarter of 2004). These properties are 100% occupied. At March 31,
2004, we also owned one property that was leased to the Federal
Express Corporation. We intend to sell the Federal Express property. Critical Accounting Policies Refer to our 2003 Annual Report on Form 10-K for a discussion of our critical
accounting policies, which include our revenue recognition of related lease
agreements, recording of real estate at depreciated cost and allocation of the
purchase price of properties we acquire to net tangible and identified
intangible assets. During the first quarter of 2004, there were no material
changes to our critical accounting policies. Results of Operations The following table compares our operating results for the three
months ended March 31, 2004 and 2003. 11




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Increase2004
    
    2003
    
    (Decrease)Rental income
    
    $
    1,043,993
    
    
    $
    76,405
    
    
    $
    967,588Expenses:Property Operations
    
    
    247,778
    
    
    
    12,618
    
    
    
    235,160Real estate taxes
    
    
    148,097
    
    
    
    5,236
    
    
    
    142,861Depreciation and
Amortization
    
    
    280,108
    
    
    
    24,148
    
    
    
    255,960General and administrative
    
    
    1,030,545
    
    
    
    95,520
    
    
    
    935,025Total expenses
    
    
    1,706,528
    
    
    
    137,522
    
    
    
    1,569,006Operating loss
    
    
    (662,535
    )
    
    
    (61,117
    )
    
    
    (601,418
    )Other income
    
    
    243,269
    
    
    
    6,311
    
    
    
    236,958Interest expense
    
    
    (398,829
    )
    
    
    (12,063
    )
    
    
    (386,766
    )Expense from issuance of warrant
    
    
    (2,097,900
    )
    
    
    
    
    
    
    (2,097,900
    )Amortization of deferred financing fees
    
    
    (3,614
    )
    
    
    
    
    
    
    (3,614
    )Loss from continuing operations
    
    
    (2,919,609
    )
    
    
    (66,869
    )
    
    
    (2,852,740
    )Discontinued operations:Income from property held for sale
    
    
    3,871
    
    
    
    20,660
    
    
    
    (16,789
    )Net loss
    
    $
    (2,915,738
    )
    
    $
    (46,209
    )
    
    $
    (2,869,529
    )
 Comparison of Three Months Ended March 31, 2004 to March 31, 2003 Rental RevenueRental revenue was $1,043,993 for 2004 and $76,405 for 2003.
The increase was due to our acquisition of four properties during 2003 and one
additional property in March 2004. Property operations expenseProperty operations expense was $247,778 for 2004
and $12,618 for 2003. The increase was due to the expansion of our operations
and acquisition of properties in 2003 and 2004. Real estate tax expenseReal estate tax expense was $148,097 for 2004 and
$5,236 for 2003. The increase was due to the expansion of our operations and
acquisition of properties in 2003 and 2004. Depreciation and amortization expenseDepreciation and amortization was
$280,108 for 2004 and $24,148 for 2003. The increase was due to the expansion
of our operations and acquisition of properties in 2003 and 2004. General and administrative expenseGeneral and administrative expense was
$1,030,545 for 2004 and $95,520 for 2003. The increase was due to the
expansion of our operations and acquisition of properties. Other incomeOther income, which consists primarily of interest income, was
$243,269 for 2004 and $6,311 for 2003. The increase was primarily due to
interest income earned on short-term investments purchased from the proceeds
raised in our January 2004 Offering. Interest expenseInterest expense (including amortization of deferred financing
fees) was $402,443 for 2004 and $12,063 for 2003. The increase was due to
additional debt incurred by us in 2003 for property acquisition and working
capital purposes. Expense from issuance of warrantIn 2004, we recognized $2,097,900 of expense
related to the exercise of a warrant to purchase 210,000 shares of our common
stock. The warrant was issued to an affiliate of one of our underwriters which
provided a line of credit to us. Discontinued operationsDiscontinued operations were $3,871 for 2004 and
$20,660 in 2003. This represents the operating results for our Harahan
property which is held for sale. We are actively marketing the sale of the Harahan property. Harahan is the only property we
own which is leased by a non-governmental tenant. 12




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##### Table of Contents



Liquidity and Capital Resources Our short-term liquidity requirements consist primarily of funds to acquire
properties and to pay for operating expenses and other expenditures directly
associated with our properties, such as:  
    
    acquisition costs, deposits on properties and purchases of properties;
    
    recurring maintenance, repairs and other operating expenses necessary to maintain our properties;
    
    property taxes and insurance expenses;
    
    interest expense and scheduled principal payments on outstanding indebtedness;
    
    capital expenditures incurred to facilitate the leasing of
space at our properties, including tenant improvements and leasing
commissions;
    
    general and administrative expenses; and
    
    distributions paid to our stockholders. Historically, we have satisfied our short-term liquidity requirements through
our existing working capital and cash provided by our operations and
borrowings. The table below sets forth the debt that we fully repaid from the proceeds of
our January 2004 public offering: 13




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##### Table of Contents



Lender
    
    Use of Funds
    
    (In Millions)Citizens First Bancorp, Inc
    
    Purchase Charleston, WV property
    
    $
    2.3Friedman Billings Ramsey
    
    Deposits on acquisitions and working capital
    
    
    1.0Genesis Financial Group, Inc.
    
    Purchase Bakersfield, CA property
    
    
    1.6Citizens First Savings Bank
    
    Working capital
    
    
    0.1Total
    
    
    
    
    
    $
    5.0
 We owed approximately $2.3 million to Citizens First Bancorp, Inc. under a $5
million line of credit. We incurred the debt in April 2003 and it accrued
interest on an annual basis at prime plus 50 basis points (4.50% at December
31, 2003). An affiliate of one of our underwriters, Friedman, Billings and Ramsey,
provided us with a $1 million line of credit, of which we borrowed
approximately $0.7 million during 2003 and an additional $0.3 million in
January 2004. The total principal on the debt was $ 1.0 million at the time it
was repaid. The debt accrued interest on an annual basis at a rate of 20%. We financed the acquisition of our Bakersfield property in part through an
approximately $1.6 million loan from Genesis Financial Group, Inc. We incurred
this debt in January 2003 and it accrued interest on an annual basis at a rate
of LIBOR plus 250 basis points (3.64% at December 31, 2003). We owed approximately $0.1 million under a $0.2 million line of credit with
Citizens First Savings Bank. We incurred the debt in June 2003 and it accrued
interest at prime (4.00% at December 31, 2003). Our current mortgages debt obligations are set forth below: Balance As OfMarch 31, 2004Lender
    
    Collateral
    
    (In Millions)Operating Properties:LaSalle Bank/GEMSA
    
    Charleston property
    
    $
    13.9LaSalle Bank/GEMSA
    
    Clarksburg property
    
    
    8.3Bank of America
    
    Kingsport property
    
    
    2.4Total operating properties
    
    
    
    
    
    $
    24.6Property held for sale:Nomura Credit/Wachovia Securities
    
    Harahan property
    
    
    3.1Total
    
    
    
    
    
    $
    27.7
 We financed the acquisition of our Charleston property in April 2003 through a
$14 million loan from LaSalle Bank, which matures on May 1, 2013. The unpaid
principal balance of the note bears interest at a rate of 5.74% per annum.
Monthly payments are amortized on a 30-year schedule, with a balloon payment
due May 1, 2013. We financed the acquisition of our Clarksburg property in April 2003 through an
approximately $8.3 million loan from LaSalle Bank, which matures on May 1,
2013. The unpaid principal balance of the note bears interest at a rate of
5.74% per annum. Monthly payments are amortized on a 30-year schedule, with a
balloon payment due May 1, 2013 We financed the acquisition of our Kingsport property in April 2003 through the
assumption of the sellers first mortgage loan in the amount of $2.3 million
from Bank of America, which matures on April 1, 2010, and an unsecured loan
issued by the seller in the amount of $0.2 million, which represents amounts
due to the seller for the sellers escrow funds that remain on deposit with the
first mortgage loan holder. The unpaid principal balance of the first mortgage
loan bears interest at a rate of 8.23% per annum, with monthly payments being
amortized on a 25-year schedule and has a balloon payment due April 1, 2010.
The unpaid principal balance of the seller loan bears interest at a rate of
8.00% per annum, requires no monthly payments and has a balloon payment of
principal due April 1, 2010. If the payment is made within five days of April
1, 2010, no interest is due and therefore not accrued. 14




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We financed the acquisition of our Harahan property in December 2002 through a
$3.2 million loan from Nomura Credit, which matures on January 11, 2013. The
unpaid principal balance of the note bears interest at a rate of 5.70% per
annum. Monthly payments are amortized on a 27-year schedule, with a balloon
payment due January 11, 2013. This amount is included in liabilities related
to property held for sale in our consolidated balance sheet. We intend to
repay this loan with proceeds from the sale of this property. The mortgages on our properties contain customary restrictive covenants,
including provisions that may limit the borrowing subsidiarys ability, without
the prior consent of the lender, to incur additional indebtedness, further
mortgage or transfer the applicable property, purchase or acquire additional
property, discontinue insurance coverage, change the conduct of its business or
make loans or advances to, enter into any transaction of merger or
consolidation with, or acquire the business, assets or equity of, any third
party. Our long-term liquidity requirements consist primarily of funds to pay for
property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital expenditures that need to be made periodically to
our properties and the costs associated with acquisitions of properties that we
pursue. Historically, we have satisfied our long-term liquidity requirements
through various sources of capital, including our existing working capital,
cash provided by operations, sales of equity securities, and long-term mortgage
indebtedness. We intend to establish fully-funded reserves, based on
independent third-party reports, for future capital expenditures. In March 2004, we placed approximately $17.3 million of operating cash into a
restricted cash account to secure a letter of credit (face value also of $17.3
million) in connection with a proposed property acquisition. The letter of
credit expires upon the closure of the proposed property acquisition. In April 2004, we entered into a $50 million revolving credit facility led by
First National Bank of Omaha. Outstanding amounts under this facility accrue
interest at the floating prime rate, as published by the Wall Street Journal,
which will not be lower than 4%. We paid a commitment fee equal to 0.50% of the
total commitment and will pay an advance fee of 0.50% of each advance. All
amounts provided pursuant to this facility will be due in May 2005. The
facility contains customary restrictive covenants, including limitations on our
ability to purchase properties under development or through unconsolidated
affiliates. We are also required to maintain a minimum tangible net worth of
not less than $90 million, a total liabilities to tangible net worth ratio of
no more than 4.0 to 1, and a minimum debt service coverage ratio of 1.2 to 1.
We are not allowed to make distributions that exceed the greater of (i) such
amount as is required to be distributed as a condition our continued status as
a REIT, or (ii) $0.25 per common share per quarter. The proceeds of this
facility will be used for short-term acquisition financing for the purchase of
federal government-leased properties that have a minimum remaining lease term
of 10 years. This facility may also be used to provide deposits for purchase
contracts or good faith deposits. Since we recently became self-managed, we have increased cash expenditures for
general and administrative expenses, including salaries, directors and
officers insurance, rent, professional fees and other corporate level
activity. We estimate that our annualized general and administrative cash
expenses for our first full year of operations to be in the range of $2.7
million to $3.1 million (exclusive of the stock warrant issued in the first
quarter of 2004 of $2.1 million and any compensation expense from the issuance
of stock grants, both of which are non-cash items). We will build up
these costs over the first full year of operation. As disclosed in
the S-11, we did not have any paid staff in 2003. On January 1, 2004,
seven staff, including the executive team, joined the company.
Through May 15, 2004, we have hired six additional employees. These
positions are necessary to be able to process the identification,
underwriting, and purchasing of the properties. These positions are
included in $2.7 to $3.1 million in projected general and
administrative expense. We believe that our existing cash will be sufficient to fund our operations for
at least the next twelve months. Cash Distribution Policy We have elected to be taxed as a REIT under the federal tax laws commencing as
of our taxable year beginning January 1, 2003. To qualify as a REIT, we must,
among other things, distribute at least 90% of our ordinary taxable income to
our stockholders. We intend to comply with these requirements and maintain our
REIT status. As a REIT, we generally will not be subject to corporate federal
income taxes on taxable income we distribute (in accordance with the federal
tax laws and applicable regulations) to our stockholders. If we fail to qualify
as a REIT in any taxable year, we will be subject to federal income taxes at
regular corporate rates and may not be able to qualify as a REIT for four
subsequent tax years. Even if we qualify as a REIT, we may be subject to
certain state and local taxes on our income and property and to federal income
and excise taxes on our undistributed taxable income, i.e., taxable income not
distributed in the amounts and in the time frames prescribed by the federal tax
laws and applicable regulations thereunder. We intend to pay to our stockholders, within the time periods prescribed by the
federal tax laws (in our case by January 31 of the following year), all or
substantially all of our annual taxable income, including gains from the sale
of real estate and recognized gains on sale of securities. We will continue our
policy of making sufficient cash distributions to stockholders in order for us
maintain REIT status under the federal tax laws and to avoid corporate income
and excise tax on undistributed income. Inflation Our GSA leases generally contain provisions designed to mitigate the adverse
impact of inflation. These provisions increase rental rates during the terms of
the leases by indexed escalations based on the Consumer Price Index. In
addition, our GSA leases generally require the tenant to pay a share of
increases in operating expenses and all increases in real estate taxes. This
may reduce our exposure to increases in costs and operating expenses resulting
from inflation. However, increases in property operating costs above the
escalation amount would harm our cash flow and may harm our ability to pay
dividends. Funds from Operations 15




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##### Table of Contents



REIT analysts generally consider funds from operations or FFO an alternative
measure of performance for an equity REIT. The National Association of Real
Estate Investment Trusts, or NAREIT, defines funds from operations as net
income, computed in accordance with accounting principles generally accepted in
the United States (GAAP), excluding gains or losses from sales of properties,
but including real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures. We believe that
FFO is helpful to investors as one of several measures of the performance of an
equity REIT. We further believe that by excluding the effect of depreciation,
amortization and gains or losses from sales of real estate, all of which are
based on historical costs, which may be of limited relevance in evaluating
current performance, FFO can facilitate comparison of operating performance
between periods and between other equity REITs. Investors should review FFO
along with GAAP Net Income Available for Common Shares and cash flow from
operating activities, investing activities and financing activities, when
evaluating an equity REITs operating performance. We compute FFO in accordance
with standards established by NAREIT, which may not be comparable to FFO
reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition
differently than us. FFO does not represent cash generated from operating
activities in accordance with GAAP, nor does it represent cash available to pay
distributions and should not be considered as an alternative to net income,
determined in accordance with GAAP, as an indication of our financial
performance, or to cash flow from operating activities, determined in
accordance with GAAP, as a measure of our liquidity, nor is it indicative of
funds available to fund our cash needs, including our ability to make cash
distributions. The following table presents a reconciliation of GAAP to our funds from
operations for the periods presented: Three Months
    
    Three MonthsEnded
    
    EndedMarch 31,
    
    March 31,2004
    
    2003Net loss
    
    $
    (2,915,738
    )
    
    $
    (46,209
    )Adjustments to
reconcile to funds from
Operations:Real estate
depreciation and
amortization (b)
    
    
    277,740
    
    
    
    23,773Funds from Operations
    
    $
    (2,637,998
    )
    
    $
    (22,436
    )Funds from Operations
per common share(a)
    
    $
    (0.18
    )
    
    $
    (0.04
    )
   (a)
    
    Funds from Operations per share is based upon our weighted average
common shares outstanding for each period presented as follows:
14,712,297 for the three months ended March 31, 2004 and 553,281 for
the three months ended March 31, 2003.(b)
    
    Excludes depreciation of non-real estate assets of $2,368 for the
three months ended March 31, 2004 and $375 for the three months ended
March 31, 2003. Risk Factors Risks Related to Our Business and Properties We commenced operations in December 2002. Our management only recently joined
us and does not have any experience operating a REIT or a public company. We commenced operations in December 2002. We are, therefore, subject to
the risks associated with the operation of any new business. Further, our
president and chief executive officer joined us in June 2003, our chief
financial officer joined us in September 2003, our director of asset
acquisition joined us in December 2003, our director of asset management joined
us in December 2003, and the remainder of our management joined us in 2004. Our
management does not have any experience operating a REIT or a publicly-owned
company. Consequently, you will be unable to fully evaluate our managements
public company operational abilities. Given our recent organization and
management experience, you should be especially cautious in drawing conclusions
about our ability to execute our business plan. We expect to experience rapid growth in the number of properties acquired and
under our management. We expect to experience a period of rapid growth. Since December 2002, we
have acquired six properties, containing 287,172 square feet for an aggregate
purchase price of approximately $44.2 million. Due to the anticipated rapid
growth of our portfolio, we cannot assure you that we will be able to expand
our management and staff with qualified and experienced personnel and implement
administrative, accounting and operational systems sufficient to integrate
these properties into our portfolio and manage any future 16




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##### Table of Contents



acquisitions of additional properties without disruptions or unanticipated
costs. Any failure to successfully integrate any future acquisitions into our
portfolio could seriously harm our results of operations and financial
condition and our ability to pay dividends. The closings of our property acquisitions are subject to conditions that may
prevent us from acquiring such properties. Our
ability to complete acquisitions depends upon many factors, such as the negotiation of definitive purchase agreements, the satisfaction of due
diligence, completion of construction, and satisfaction of customary closing
conditions. Any inability to complete acquisitions within our anticipated time
frames may harm our financial results and our ability to pay dividends. Our use of debt financing could decrease our cash flow and expose us to risk of
default under our debt documents. Our policy is to use debt to finance, on average, approximately 75% of the
acquisition cost of the properties that we buy. As of March 31, 2004, we had
approximately $27.5 million of outstanding indebtedness. Since we anticipate that our cash from operations will be insufficient to
repay all of our indebtedness prior to maturity, we expect that we will have to
repay debt through refinancings, sale of properties or sale of additional
equity. If we are unable to refinance our indebtedness on acceptable terms, or
at all, we might be forced to dispose of one or more of our properties on
unfavorable terms, which might result in losses to us and which might adversely
affect our cash available for distribution to our stockholders. If prevailing
interest rates or other factors at the time of a refinancing result in higher
interest rates on such refinancing, our interest expense would increase, which
could seriously harm our operating results and financial condition and our
ability to pay dividends.  Our debt and any increase in our debt may be detrimental to our business
and financial results by:
    
    requiring us to use a substantial portion of our cash flow from
operations to pay interest, which reduces the amount available for
the operation of our properties or the payment of dividends;
    
    violating restrictive covenants in our loan documents, which
would entitle the lenders to accelerate our debt obligations and
foreclose on our properties;
    
    placing us at a competitive disadvantage compared to our
competitors that have less debt;
    
    making us more vulnerable to economic and industry downturns
and reducing our flexibility in responding to changing business and
economic conditions;
    
    requiring us to sell one or more properties, possibly on
unfavorable terms; and
    
    limiting our ability to borrow funds for operations or to
finance acquisitions in the future or to refinance our indebtedness
at maturity on terms as or more favorable than the terms of our
original indebtedness. Because our principal tenant is the U.S. government, our properties may have a
higher risk of terrorist attack than similar properties that are leased to
non-governmental tenants. Because our principal tenant is the U.S. government, our properties may
have a higher risk of terrorist attack than similar properties that are leased
to non-governmental tenants. Terrorist attacks may negatively affect our
operations and an investment in our common stock. We cannot assure you that
there will not be further terrorist attacks against the United States or the
United States government. Some of our properties could be considered high
profile government buildings, which may make these properties more likely to
be viewed as terrorist targets. These attacks or armed conflicts may directly
impact the value of our properties through damage, destruction, loss or
increased security costs. Certain losses resulting from these types of events
are uninsurable and others would not be covered by our current terrorism
insurance. Additional terrorism insurance may not be available at a reasonable
price or at all. We depend on the U.S. government for most of our revenues. Any failure by the
U.S. government to perform its obligations or renew its leases upon expiration
may harm our cash flow and ability to pay dividends. Rent from the U.S. government represented 100% of our revenues from
continuing operations for the three months ended March 31, 2004 and for the
year ended December 31, 2003. In addition, the U.S. government leased 100% of
our total leased square feet of property not held for sale as of March 31,
2004. Any default by the U.S. government, or its failure to renew its leases
with us upon their expiration, could cause interruptions in the receipt of
lease revenue or result in vacancies, or both, which would reduce our revenue
until the affected property is leased, and could decrease the ultimate value of
the affected property upon sale. Further, failure on the part of a tenant to
comply with the terms of a lease may give us the right to terminate the lease,
repossess the applicable property and enforce the payment obligations under the
lease; however, we would be required to find another tenant. We cannot assure
you that we would be able to find another tenant without incurring substantial
costs, or at all, or that, if another tenant were found, we would be able to
enter into a new lease on favorable terms. Our leases with the U.S. government
provide that the U.S. government may assign the lease and be relieved from all
obligations under the lease, other than unpaid rent and other liabilities
outstanding on the date of the assignment, subject to our prior written
consent, which we may not unreasonably withhold. If this were to occur, it is
unlikely that a successor tenant would have the same credit strength as the
U.S. government. 17




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##### Table of Contents



An increase in the operating costs of our government-leased properties would
harm our cash flow and ability to pay dividends. Our objective is to acquire government-leased properties in which the
tenant is wholly responsible for any increases in operating costs that apply to
the property. However, this type of triple-net lease is not typical of the
leases entered into through the GSA. Under present practice, most GSA leases
cover increases in real estate taxes above a base amount. These GSA leases also
increase that portion of the rent applicable to other operating expenses by an
agreed upon percentage based upon the Consumer Price Index. To the extent
operating costs other than real estate taxes increase at a rate greater than
the specified percentage, our cash flow would be harmed and our ability to pay
dividends may be harmed. If we are unable to lease properties that are partially or completely vacant,
we may be required to recognize an impairment loss with respect to the carrying
values of these properties, which may seriously harm our operating results and
financial condition. We intend to acquire properties that are fully leased to government
entities. However, any of our properties may become partially or completely
vacant in the future. If we are unable to lease these properties and generate
sufficient cash flow to recover the carrying value of these properties, we may
be required to recognize an impairment loss, which could seriously harm our
operating results and financial condition. Restrictive covenants in our loan documents may restrict our operating or
acquisition activities, which may harm our financial condition and operating
results. The mortgages on our properties contain customary restrictive covenants,
including provisions that may limit the borrowing subsidiarys ability, without
the prior consent of the lender, to incur additional indebtedness, further
mortgage or transfer the applicable property, purchase or acquire additional
property, discontinue insurance coverage, change the conduct of its business or
make loans or advances to, enter into any transaction of merger or
consolidation with, or acquire the business, assets or equity of, any third
party. In addition, our future lines of credit or loans may contain financial
covenants, further restrictive covenants and other obligations. If we breach
covenants or obligations in our debt agreements, the lender can generally
declare a default and require us to repay the debt immediately and, if the debt
is secured, can foreclose on the property securing the loan. In order to meet
our debt service obligations, we may have to sell properties either potentially
at a loss or at times that prohibit us from achieving attractive returns. Any
failure to pay our indebtedness when due or failure to cure events of default
could result in higher interest rates during the period of the loan default and
could ultimately result in the loss of properties through foreclosure. Increasing competition for the acquisition of government-leased properties may
impede our ability to make future acquisitions or may increase the cost of
these acquisitions, which could harm our operating results and financial
condition. We compete with many other entities for the acquisition of
government-leased properties. Our competitors include financial institutions,
institutional pension funds, other REITs, other public and private real estate
companies and private real estate investors. These competitors may prevent us
from acquiring desirable properties or increase the price we must pay for our
real estate investments. Our competitors may have greater resources than we do,
and may be willing to pay more for similar property. In particular, larger
REITs may enjoy significant competitive advantages that result from, among
other things, a lower cost of capital and enhanced operating efficiencies. In
addition, the number of entities and the amount of funds competing for
government-leased properties may increase, resulting in increased demand and
increased prices paid for these properties. If we are forced to pay higher
prices for properties, our profitability may decrease, and our stockholders may
experience a lower return on their investment. Increased competition for
properties may also preclude us from acquiring those that would generate
attractive returns to us. Our acquisitions of government-leased properties may result in disruptions to
our business as a result of the burden placed on management. Our growth strategy involves the acquisition of government-leased
properties. These acquisitions may cause disruptions in our operations and
divert managements attention away from our day-to-day operations, which could
impair our relationships with our current tenants and employees. In addition,
if we were to acquire properties indirectly by acquiring another entity, we may
be unable to integrate effectively the operations and personnel of the acquired
business or to train, retain and motivate any key personnel from the acquired
business. Any inability of our management to implement effectively our
acquisitions may cause disruptions to our business and may harm our operating
results and financial condition, as well as our ability to pay dividends. We have limited time to perform due diligence on many of our acquired
properties, which could subject us to significant unexpected liabilities and
under-performance of the acquired properties. When we enter into an agreement to acquire a property, we often have
limited time to complete our due diligence prior to acquiring the property.
Because our internal resources are limited, we may rely on third parties to
conduct a portion of our due diligence. For example, we have in the past
engaged environmental consultants, appraisers, professional engineers and
lawyers to help perform due diligence. To the extent we or these third parties
underestimate or fail to identify risks and liabilities associated with the
properties we acquire, we may incur unexpected liabilities or the property may
fail to perform in accordance with our projections. If we do not accurately
assess during the due diligence phase the value of, and liabilities associated
with, properties prior to their acquisition, we may pay a purchase price that
exceeds the current fair value of the assets. As a result, material goodwill
and other intangible assets would be required to be recorded, which could
result in significant charges in future periods. These charges, in addition to
the financial impact of significant liabilities that we may assume, could
seriously harm our financial and operating results, as well as our ability to
pay dividends. 18




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Our cash flow is not assured. If our cash flow is reduced, we may not be able
to pay dividends. We intend to distribute to our stockholders all or substantially all of
our taxable REIT income each year in order to comply with the distribution
requirements of the federal tax laws and to avoid federal income tax and the
nondeductible excise tax. We have not established a minimum dividend payment
level. Our ability to pay dividends may be adversely affected by the risks
described in this report. All distributions will be made at the discretion of
our board of directors and will depend on our earnings, our financial
condition, maintenance of our REIT status and other factors that our board of
directors may deem relevant from time to time. We cannot assure you that we
will be able to pay dividends in the future.  Our ability to pay dividends is based on many factors, including:
    
    our ability to make additional acquisitions;
    
    our success in negotiating favorable lease terms;
    
    our tenants ability to perform under their leases; and
    
    efficient management of our properties. We also cannot assure you that the level of our dividends will increase
over time or the receipt of rental revenue in connection with future
acquisitions of properties will increase our cash available for distribution to
stockholders. In the event of defaults or lease terminations by our tenants,
rental payments could decrease or cease, which would result in a reduction in
cash available for distribution to our stockholders. If our cash available for
distributions generated by our assets is less than our expected dividend
distributions, or if such cash available for distribution decreases in future
periods from expected levels, our ability to make the expected distributions
would be adversely affected. Any such failure to make expected distributions
may result in a decrease in the market price of our stock. Our board of directors may alter our investment policies at any time without
stockholder approval. Our board of directors may alter our investment policies at any time
without stockholder approval. Changes to these policies may adversely affect
our financial performance. We have incurred historical losses and may incur future losses. We have had historical accounting losses of $2.9 million for the three
months ended March 31, 2004 and $0.4 million and $5,085 for the years ended
December 31, 2003 and 2002, respectively, and had an accumulated deficit of
$3.3 million as of March 31, 2004. We cannot assure you that we will not have
similar losses in the future. Risks Related to Our Organization and Structure We depend on key personnel with long-standing business relationships, the loss
of whom could threaten our ability to operate our business successfully. Our future success depends, to a significant extent, upon the continued
services of Thomas D. Peschio, our president and chief executive officer, and
of the other members of our management team. In particular, the relationships
that Mr. Peschio and the other members of our management team have developed
with existing and prospective developers of government-leased properties is
critically important to the success of our business. Although we have an
employment agreement with Mr. Peschio and other key executives, we cannot
assure you that Mr. Peschio or the other executives will remain employed with
us. We do not maintain key person life insurance on any of our officers. The
loss of services of Mr. Peschio or other senior managers would harm our
business and our prospects. Our board of directors may authorize the issuance of additional shares that may
cause dilution. In connection with future equity offerings, the board of directors may
authorize the issuance of additional shares of common stock. The issuance of
additional shares could substantially dilute our existing stockholders. Our board of directors may authorize the issuance of shares with differing
dividend rights that could harm our stockholders right to receive dividends. Our board of directors has the power to issue preferred stock or other
securities that have distribution rights senior to that of the common stock.
Any superior dividend rights could prevent us from paying dividends to the
holders of our common stock. Our rights and the rights of our stockholders to take action against directors
and officers are limited. Maryland law provides that a director has no liability in that capacity if
he or she performs his or her duties in good faith, in a manner he or she
reasonably believes to be in our best interests and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances. Our governing documents obligate us to indemnify our directors
and officers for actions taken by them in 19




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those capacities to the extent permitted by Maryland law. Generally,
Maryland law permits indemnification except in instances where the person
seeking indemnification acted in bad faith or with active and deliberate
dishonesty, or in instances where the person actually received an improper
personal benefit in money, property or services or, in the case of a criminal
proceeding, the person had reasonable cause to believe that his or her actions
were unlawful. Additionally, we may be obligated to fund the defense costs
incurred by our directors and officers. In addition, our governing documents
limit the liability of our directors and officers for money damages, except for
liability resulting from:  
    
    actual receipt of an improper benefit or profit in money, property or
services; or
    
    a final judgment based upon a finding of active and deliberate
dishonesty by the director, trustee or officer that was material to
the cause of action adjudicated. As a result, we and our stockholders may have more limited rights against
our directors and officers than might otherwise exist. Our ownership limitations may restrict business combination opportunities. To qualify as a REIT under the federal tax laws, no more than 50% of our
outstanding shares may be owned, directly or indirectly by five or fewer
individuals (as defined in the federal tax laws to include certain entities)
during the last half of each taxable year (other than our first REIT taxable
year). To preserve our REIT status, our charter generally prohibits direct or
indirect ownership by any person of more than 9.8% of the number or value of
outstanding shares of any class of our securities, including our common stock.
Generally, common stock owned by affiliated owners will be aggregated for
purposes of the ownership limitation. Any transfer of our common stock that
would disqualify our REIT status will be null and void, and the intended
transferee will acquire no rights in such stock. The ownership limitation could
have the effect of delaying, deterring or preventing a change in control or
other transaction in which holders of common stock might receive a premium for
their common stock over the then current market price or which such holders
might believe to be otherwise in their best interest. Further, shares that are
transferred in excess of the 9.8% ownership limit will be designated as excess
shares subject to redemption. The ownership limitation provisions also may
make our common stock an unsuitable investment vehicle for any person seeking
to obtain, either alone or with others as a group, ownership of more than 9.8%
of the number or value of outstanding shares of any class of our securities. Provisions of our charter documents could deter a takeover, which could inhibit
our stockholders ability to receive an acquisition premium for their shares. Provisions of our charter and bylaws could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. Maryland law may discourage a third party from acquiring us, which could
inhibit your ability to receive an acquisition premium for your shares. Maryland law provides broad discretion to our board of directors with
respect to its duties in considering a change in control of our company,
including that our board is subject to no greater level of scrutiny in
considering a change in control transaction than with respect to any other act
by our board. Maryland law restricts mergers and other business combinations between our
company and an interested stockholder. An interested stockholder is defined
as any person who is the beneficial owner of 10% or more of the voting power of
our common stock and also includes any of our affiliates or associates that, at
any time within the two year period prior to the date of a proposed merger or
other business combination, was the beneficial owner of 10% or more of our
voting power. A person is not an interested stockholder if, prior to the most
recent time at which the person would otherwise have become an interested
stockholder, our board of directors approved the transaction which otherwise
would have resulted in the person becoming an interested stockholder. For a
period of five years after the most recent acquisition of shares by an
interested stockholder, we may not engage in any merger or other business
combination with that interested stockholder or any affiliate of that
interested stockholder. After the five year period, any merger or other
business combination must be approved by our board of directors and by at least
80% of all the votes entitled to be cast by holders of outstanding voting stock
and two-thirds of all the votes entitled to be cast by holders of outstanding
voting stock other than the interested stockholder or any affiliate or
associate of the interested stockholder unless, among other things, the
stockholders (other than the interested stockholder) receive a minimum price
for their common stock and the consideration received by those stockholders is
in cash or in the same form as previously paid by the interested stockholder
for its common stock. These provisions of the business combination statute do
not apply to business combinations that are approved or exempted by our board
of directors prior to the time that the interested stockholder becomes an
interested stockholder. However, the business combination statute could have
the effect of discouraging offers from third parties to acquire us and
increasing the difficulty of successfully completing this type of offer. Our chief executive officer and chief financial officer have employment
agreements that provide them with benefits in the event their employment is
terminated, which could prevent or deter a potential acquirer from pursuing a
change of control of our company. We have entered into employment agreements with Thomas D. Peschio, our
president and chief executive officer, and Nancy D. Olson, our treasurer and
chief financial officer, which provide them with severance benefits if their
employment ends due to a termination by us without cause. In the case of such
termination, we would have to pay severance and the vesting of their restricted
stock will 20




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accelerate. Mr. Peshio also has the right to terminate his employment
agreement upon a change of control of our company. These agreements could
prevent or deter a change of control of our company that might involve a
premium price for our common stock or otherwise be in the best interests of our
stockholders. Risks Related to the Real Estate Industry Mortgage debt obligations expose us to increased risk of property losses, which
could harm our financial condition, cash flow and ability to satisfy our other
debt obligations and pay dividends. Our policy is to use debt to finance, on average, approximately 75% of the
acquisition cost of the properties that we buy. Incurring mortgage debt
increases our risk of property losses because defaults on indebtedness secured
by properties may result in foreclosure actions initiated by lenders and
ultimately our loss of the property securing any loans for which we are in
default. For tax purposes, a foreclosure of any of our properties would be
treated as a sale of the property for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. The outstanding balance of the
debt secured by the mortgage could exceed our tax basis in the property. If
this occurs, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds. As a result, we may be required to identify and
utilize other sources of cash to pay our taxes, which may result in a decrease
in cash available for distribution to our stockholders. In addition, our default under any one of our mortgage debt obligations
may increase the risk of our default on our other indebtedness. If this occurs,
our financial condition, cash flow and ability to satisfy our other debt
obligations or ability to pay dividends may be harmed. Illiquidity of real estate investments could significantly impede our ability
to respond to adverse changes in the performance of our properties and harm our
financial condition. Because real estate investments are relatively illiquid, our ability to
promptly sell one or more properties in our portfolio in response to changing
economic, financial and investment conditions is limited. The real estate
market is affected by many factors that are beyond our control, including:  
    
    adverse changes in national and local economic and market conditions;
    
    changes in interest rates and in the availability, cost and terms of debt financing;
    
    changes in governmental laws and regulations, fiscal policies
and zoning ordinances and costs of compliance with laws and
regulations, fiscal policies and ordinances;
    
    the ongoing need for capital improvements, particularly in older structures;
    
    changes in operating expenses; and
    
    civil unrest, acts of war and natural disasters, including
earthquakes and floods, which may result in uninsured and
underinsured losses. We cannot predict whether we will be able to sell any property for the
price or on the terms set by us, or whether any price or other terms offered by
a prospective purchaser would be acceptable to us. We also cannot predict the
length of time needed to find a willing purchaser and to close the sale of a
property. These factors and any others that would impede our ability to respond
to adverse changes in the performance of our properties could harm our
operating results and financial condition, as well as our ability to pay
dividends to stockholders. Compliance with environmental laws could materially increase our operating
expenses. Our properties may be subject to environmental liabilities. An owner of
real property can face liability for environmental contamination created by the
presence or discharge of hazardous substances on the property. We may face
liability regardless of:  
    
    our knowledge of the contamination;
    
    the timing of the contamination;
    
    the cause of the contamination; or
    
    the party responsible for the contamination of the property. There may be environmental problems associated with our properties of
which we are unaware. Some of our properties use, or may have used in the past,
underground tanks for the storage of petroleum-based or waste products that
could create a potential for release of hazardous substances. If environmental
contamination exists on our properties, we could become subject to strict,
joint and several liability for the contamination by virtue of our ownership
interest. 21




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The presence of hazardous substances on a property may adversely affect
our ability to sell the property and we may incur substantial remediation
costs. In addition, although we may require in our leases that tenants operate
in compliance with all applicable laws and to indemnify us against any
environmental liabilities arising from a tenants activities on the property,
we could nonetheless be subject to strict liability by virtue of our ownership
interest, and we cannot be sure that our tenants would satisfy their
indemnification obligations under the applicable sales agreement or lease. The
discovery of environmental liabilities attached to our properties could harm
our results of operations and financial condition and our ability to pay
dividends to stockholders. Our properties may contain or develop harmful mold, which could lead to
liability for adverse health effects and costs of remediating the problem. When excessive moisture accumulates in buildings or on building materials,
mold growth may occur, particularly if the moisture problem remains
undiscovered or is not addressed over a period of time. Some molds may produce
airborne toxins or irritants. Concern about indoor exposure to mold has been
increasing as exposure to mold may cause a variety of adverse health effects
and symptoms, including allergic or other reactions. As a result, the presence
of significant mold at any of our properties could require us to undertake a
costly remediation program to contain or remove the mold from the affected
property. In addition, the presence of significant mold could expose us to
liability from our tenants, employees of our tenants and others if property
damage for health concerns arise. Compliance with the Americans with Disabilities Act and fire, safety and other
regulations may require us to make unexpected expenditures that adversely
impact our ability to pay dividends. Some or all of our properties may be required to comply with the Americans
with Disabilities Act, or the ADA. The ADA has separate compliance requirements
for public accommodations and commercial facilities, but generally requires
that buildings be made accessible to people with disabilities. Compliance with
the ADA requirements could require removal of access barriers and
non-compliance could result in imposition of fines by the U.S. government or an
award of damages to private litigants, or both. We will attempt to shift the
cost of compliance with the ADA to our tenants whenever possible. However, if
we are unable to negotiate lease terms to this effect, if required changes
involve greater expenditures than anticipated, or if the changes must be made
on a more accelerated basis than anticipated, we could be required to expend
our own funds to comply with the provisions of the ADA, which could adversely
affect our results of operations and financial condition and our ability to
make distributions to stockholders. In addition, we are required to operate our
properties in compliance with fire and safety regulations, building codes and
other land use regulations, as they may be adopted by governmental agencies and
bodies and become applicable to our properties. We may be required to make
substantial capital expenditures to comply with those requirements and these
expenditures could harm our ability to pay dividends to our stockholders. An uninsured loss or a loss that exceeds the insurance policy limits on our
properties could subject us to lost capital or revenue on those properties. Some of our properties may be covered by flood and earthquake insurance
policies obtained by and paid for by the tenants as part of their risk
management programs. Additionally, we have obtained blanket liability, flood
and property damage insurance policies to protect us and our properties against
loss should the indemnities and insurance policies provided by the tenants fail
to restore the properties to their condition prior to a loss. All of these
policies may involve substantial deductibles and certain exclusions. In certain
areas, we may have to obtain earthquake insurance on specific properties as
required by our lenders or by law. We have also obtained terrorism insurance on
all of our GSA-leased properties, but this insurance is subject to exclusions
for loss or damage caused by nuclear substances, pollutants, contaminants and
biological and chemical weapons. Should a loss occur that is uninsured or in an
amount exceeding the combined aggregate limits for the policies noted above, or
in the event of a loss that is subject to a substantial deductible under an
insurance policy, we could lose all or part of our capital invested in, and
anticipated revenue from, one or more of the properties, which could harm our
operations results and financial condition, as well as our ability to pay
dividends to stockholders at historical levels or at all. Tax Risks of Our Business and Structure An investment in our common stock has various tax risks that could affect the
value of our stockholders investment, including the treatment of distributions
in excess of earnings, the timing of dividend payments, and the inability to
apply passive losses against distributions. The effects of federal, state and local income tax law on an investment in
our common stock are complex, including the treatment of distributions in
excess of current and accumulated earnings and profits, to the extent that they
exceed the adjusted basis of an investors common stock, as long-term capital
gain (or short-term capital gain if the shares have been held for less than one
year), the treatment of any dividend declared by us in October, November or
December of any year payable to a stockholder of record on a specific date in
any such month as being paid by us and received by the stockholder on December
31 of such year, the treatment of any gain or loss realized upon a taxable
disposition of shares by a stockholder who is not a dealer in securities as a
long-term capital gain or loss if the shares have been held for more than one
year, otherwise as short-term capital gain or loss, the treatment of
distributions that we properly designate as capital gain dividends as taxable
to stockholders as gains (to the extent that they do not exceed our actual net
capital gain for the taxable year) from the sale or disposition of a capital
asset held for greater than one year, and the failure to treat distributions we
make and gain arising from the sale or exchange by a stockholder of shares of
our stock as passive income, meaning stockholders generally will not be able to
apply any passive losses against such income or gain. Future distributions may include a significant portion as a return of capital.
While we have not borrowed for the specific purpose 22




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of paying distributions in the past, our prior borrowings allowed us to pay
distributions from our cash from operations. Our distributions may exceed the amount of our income as a REIT. If so,
the excess distributions will be treated as a return of capital to the extent
of the stockholders basis in our stock and the stockholders basis in our
stock will be reduced by such amount. To the extent distributions exceed a
stockholders basis in our stock, the stockholder will recognize capital gain,
assuming the stock is held as a capital asset. All of our prior distributions
consisted of a return of capital. Distribution requirements imposed by law limit our flexibility in executing our
business plan. As a REIT, we generally are required to distribute to our stockholders at
least 90% of our taxable REIT income each year in order to maintain our status
as a REIT for federal income tax purposes. Taxable REIT income is determined
without regard to the deduction for dividends paid and by excluding net capital
gains. We are also required to pay tax at regular corporate rates to the extent
that we distribute less than 100% of our taxable income (including net capital
gains) each year. In addition, we are required to pay 4% nondeductible excise
tax on the amount, if any, by which certain distributions we pay with respect
to any calendar year are less than the sum of 85% of our ordinary income for
that calendar year, 95% of our capital gain net income for the calendar year
and any amount of our income that was not distributed in prior years. We intend to distribute to our stockholders all or substantially all of
our taxable REIT income each year in order to comply with the distribution
requirements of the federal tax laws and to avoid federal income tax and the
nondeductible excise tax. Differences in timing between the receipt of income
and the payment of expenses in arriving at taxable REIT income and the effect
of required debt amortization payments could require us to borrow funds on a
short-term basis to meet the distribution requirements that are necessary to
achieve the tax benefits associated with qualifying as a REIT. We may incur additional indebtedness in order to meet our distribution
requirements. While we have not borrowed for the specific purpose of paying
distributions, our prior borrowings allowed us to pay distributions from our
cash from operations. As a REIT, we are required to distribute at least 90% of our taxable REIT
income, which limits the amount of cash we will have available for other
business purposes, including amounts to fund our growth. It is possible that
the differences between the time we actually receive revenue or pay expenses
and the period we report those items for distribution purposes, and potentially
insufficient cash, could result in our having to borrow funds on a short-term
basis to meet the 90% distribution requirement. While we have not borrowed for
the specific purpose of paying distributions, our prior borrowings allowed us
to pay distributions from our operations. These borrowings may decrease cash
available for distribution. Our disposal of properties may have negative implications, including
unfavorable tax consequences. If we make a sale of a property directly, and it is deemed to be a sale of
dealer property or inventory, the sale may be deemed to be a prohibited
transaction under the provisions of the federal tax laws applicable to REITs,
in which case our gain from the sale would be subject to a 100% penalty tax. If
we believe that a sale of a property might be treated as a prohibited
transaction, we will attempt to structure a sale through a taxable REIT
subsidiary, in which case the gain from the sale would be subject to corporate
income tax but not the 100% prohibited transaction tax. We cannot assure you,
however, that the IRS would not assert successfully that sales of properties
that we make directly, rather than through a taxable REIT subsidiary, were
sales of dealer property or inventory, in which case the 100% penalty tax would
apply. If we fail to remain qualified as a REIT, our dividends will not be deductible
by us, and our income will be subject to taxation. If we fail to remain qualified as a REIT, our dividends will not be
deductible by us and we will be subject to a corporate level tax on our taxable
income. This would substantially reduce our cash available to pay dividends and
the yield on your investment. Incurring corporate income tax liability might
cause us to borrow funds, liquidate some of our investments or take other steps
which could negatively affect our operating results. If our REIT status is
terminated because of our failure to meet a REIT qualification requirement or
if we voluntarily revoke our election, we would be disqualified from electing
treatment as a REIT for the four taxable years following the year in which REIT
status is lost. We may be subject to federal and state income taxes that would harm our
financial condition. Even if we maintain our status as a REIT, we may become subject to federal
income taxes and related state taxes. For example, if we have net income from a
sale of dealer property or inventory, that income will be subject to a 100%
penalty tax. In addition, we may not be able to pay sufficient distributions to
avoid corporate income tax and the 4% excise tax on undistributed income. We
may also be subject to state and local taxes on our income or property, either
directly or at the level of our operating partnership or at a level of the
other entities through which we indirectly own our properties that would
aversely affect our operating results. We cannot assure you that we will be
able to maintain REIT status, or that it will be in our best interests to
continue to do so. We may be subject to adverse legislative or regulatory tax changes that could
reduce the market price of our common stock. The federal tax laws governing REITs and the administrative
interpretations of those laws may be amended at any time. Any of those new laws
or interpretations may take effect retroactively. On May 28, 2003, President
Bush signed into law a tax bill that reduces the tax rate on both dividends and
long-term capital gains for most non-corporate taxpayers to 15% until 2008.
This reduced tax rate generally 23




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does not apply to ordinary REIT dividends, which will continue to be taxed
at the higher tax rates applicable to ordinary income. This legislation could
cause shares in non-REIT corporations to be a more attractive investment to
individual investors than they had been, and could harm the market price of our
common stock. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our future income, cash flows and fair values relevant to financial
instruments depend upon prevailing market interest rates. Market risk refers to
the risk of loss from adverse changes in market prices and interest rates. Market Risk Related to Fixed-Rate Debt As of March 31, 2004, our debt included fixed-rate mortgage notes with a
carrying value of $27.7 million (including $3.1 million related to a property
held for sale). Changes in market interest rates on our fixed-rate debt impacts
the fair market value of the debt, but it has no impact on interest incurred or
cash flow. The sensitivity analysis related to our fixed debt assumes an
immediate 100 basis point move in interest rates from their actual March 31,
2004 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a
decrease in the fair value of our fixed-rate debt by approximately $1.7 million
at March 31, 2004. A 100 basis point decrease in market interest rates would
result in an increase in the fair market value of our fixed-rate debt by
approximately $1.9 million at March 31, 2004. Interest Rate Sensitivity The following table provides information about our financial instruments
that are subject to interest rate sensitivity. The table presents our mortgage
notes payable by expected maturity date and weighted average interest rate as
of March 31, 2004. Interest Rate Sensitivity 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalMortgage notes payable
(a):Fixed rate amount
    
    $
    374,655
    
    
    $
    399,486
    
    
    $
    423,652
    
    
    $
    444,421
    
    
    $
    480,066
    
    
    $
    25,594,329
    
    
    $
    27,716,609Weighted-average
interest rate
    
    
    5.99
    %
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.03
    %
    
    
    5.95
    %
    
    
    5.96
    %
 (a)We have included $3.1 million of mortgage debt related to a property held
for sale in 2004. 
 Item 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. Our management continues
to review our internal controls and procedures and the effectiveness of those
controls. As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our CEO and
CFO, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15(e) of the Securities Exchange
Act of 1934. Based upon that evaluation, our CEO and CFO concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings. Changes in internal control over financial reporting. There have been no
significant changes in the Companys internal controls or in other factors that
could significantly affect internal controls during the quarter ended March 31,
2004. 24




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PART II  OTHER INFORMATION 
 Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS We completed a registered public offering on January 26, 2004. The SEC declared
the registration statement for this offering (Form S-11, file nos. 333-109565
and 333-112219) effective on January 26, 2004. We registered 19,320,000 shares
of common stock, including 2,520,000 shares subject to the underwriters
over-allotment option, with an aggregate public offering price of $193.2
million. The offering terminated upon its completion. The initial public offering commenced on January 6, 2004 and we sold all of the
shares that we registered for aggregate proceeds of $193.2 million through an
underwriting syndicate managed by Friedman, Billings, Ramsey & Co., Inc., BB&T
Capital Markets, a Division of Scott & Stringfellow, Inc., and Flagstone
Securities, LLC. Our expenses for the offering included approximately $13.5
million for underwriting discounts and commissions, $0.7 million for
reimbursement of underwriter expenses, $2.0 million for other expenses, for a
total of $16.2 million. All of these expenses were paid directly to the
recipients and none were paid to any of our officers, directors, ten percent or
greater stockholders, or affiliates. After payment of the foregoing expenses, we received approximately $177.0
million in net proceeds from the offering. As of May 15, 2004, we had used the
proceeds as follows:  
    
    approximately $1.0 million to repay outstanding indebtedness owed to
an affiliate of one of our underwriters, Friedman, Billings, Ramsey &
Co., Inc.;
    
    approximately $1.6 million to repay outstanding indebtedness owed to
Genesis Financial Group, Inc., a former affiliate, that was used to
finance the acquisition of our Bakersfield property;
    
    approximately $2.4 million to repay outstanding indebtedness under a
line of credit owed to Citizens First Bancorp, Inc. that was used to
finance the acquisition of our Charleston property;
    
    approximately $0.1 million to repay outstanding indebtedness owed to
Citizens First Savings Bank that was used for general working capital
purposes;
    
    approximately $5.1 million to complete the Mineral Wells acquisition;
    
    approximately $28 million to complete the Pittsburgh acquisition;
    
    approximately $17.3 million in restricted cash to secure a letter of credit in connection with a proposed property acquisition;
    
    approximately $1.0 million to fund deposits on proposed property acquisitions; and
    
    approximately $0.5 million for general working capital purposes. The remainder of the net proceeds are temporarily invested in money market
investments and will ultimately be used for acquisitions and working capital. 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits: 10.15
    
    Revolving Credit Agreement31.1
    
    Certification of Chief Executive Officer pursuant to SEC Rule 13a-14,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to SEC Rule 13a-14,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
  (b)
    
    Reports on Form 8-K: On March 30, 2004, we filed a current report on Form 8-K to furnish our
earnings press release and Supplemental Operating and Financial Data package of
financial results for the year and quarter ended December 31, 2003. 25




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. GOVERNMENT PROPERTIES TRUST, INC.Date: May 17, 2004
    
    By:
    
    /s/ NANCY D. OLSONNancy D. OlsonChief Financial Officer and Treasurer(principal financial officer)
 26